Crisis exacerbates Taiwan life insurers' woes

The sector heavily depends on spread gains which are sensitive to volatility.

The ongoing economic crisis is worsening Taiwan life insurers’ already weak product mix and high investment risks, according to a Moody’s report.

The sector is dominated by traditional life and annuity products that carry high survival benefits, including guaranteed yields as high as 4% in some legacy policies, said analyst Kelvin Kwok.

“This means that insurers rely heavily on spread gains, which exposes earnings to capital market volatility.”

A meaningful change in product mix is not expected amongst insurers, the report added. In fact, social distancing measures and weaker economic growth will depress new policy sales and further delay insurers' shift toward a product mix less dependent on spreads.

“Given prolonged low interest rates, some insurers could start reporting negative investment spreads as they reinvest maturing bond holdings at lower yields, further weakening their profits and credit profiles,” Moody’s said.

Moreover, insurers' investments are largely in equities and foreign investments. In particular, foreign investments represented close to 70% of the industry's invested assets as of end-2019. This exposes insurers to financial market volatility, which could remain high in the next 12-18 months due to lingering uncertainties in the aftermath of the pandemic, the report warned.

Capitalisation remains highly sensitive to equity market movements, and has been decayed by the outsized drop in major stock indices despite being mitigated by valuation gains on bonds from lower yields. Nonetheless, the anticipated slowdown in premium growth will ease the stress on capital in the next 12-18 months.

Insurers are also expected to amp up capital issuance and preservation to fulfill more stringent regulatory capital requirements, the report concluded.